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Azerbaijan: Economy Grows, But Problems Persist


By Michael Wyzan



Laxenburg, Austria; 6 May 1999 (RFE/RL) -- Economic statistics for last year indicate Azerbaijan weathered Russia's economic crisis relatively well.

The country's economy expanded about 10 percent, making it the fastest growing in the Commonwealth of Independent States. Growth was led by a booming construction industry and, to a lesser extent, the transport and communications sectors.

There are, however, a number of problems in the external sector -- mostly related to Azerbaijan's continuing dependence on oil. The problems indicate that officials should make diversifying the economy a high priority.

Developments in the oil industry were both positive and negative. Crude oil production rose to more than 11 million metric tons last year from 9 million tons the year before, as new offshore wells of the Azerbaijan International Operating Company (AIOC) came on line.

These gains were mostly wiped out by last year's drop in oil prices. Prices fell on average more than 18 percent.

Because of the price fall, earnings from oil exports fell 36 percent in the first nine months of last year, contributing to a decline in total exports of 11 percent. At the same time, imports rose 22 percent. The imbalance created a trade deficit of $740 million. In 1997, the deficit was only $448 million.

The drop in oil prices had an adverse effect on the state budget. The government last year ran a deficit of 4.3 percent of gross domestic product, up from 3.6 percent the year before. Oil-related revenue accounted for just under half of total budget revenue in 1997, but fell to 31.7 percent in the first half of 1998.

The currency, the manat, survived last year's ruble drop and closed the year almost unchanged from 1997. In the face of such stability, consumer prices declined 3.5 percent last year. The standard of living benefited little, as average monthly wages -- both in dollars and in constant manats -- grew more slowly last year than in 1997.

This year's prognosis suggests that economic growth will slow, with the government envisioning 7 percent GDP growth and inflation of 4 percent.

Among the worrying indicators are cutbacks by international oil consortia operating in the country. The AIOC, for example, announced in February it would cut costs 20 percent and lay off 25 to 30 expatriate staff. The number of foreigners working in Baku is now declining, having peaked at 6,000. Cuts in the oil sector, though, may be offset by a rise in oil prices this year.

This outflow of foreign workers reflects more than a downturn in oil. It was reported in March that more than 100 Turkish companies left Azerbaijan last year because of corruption among government officials and confusing tax policies.

In granting the country a needed $112 million loan in January, the International Monetary Fund pointed to the need to strengthen and streamline the public sector, restructure banks, improve the privatization process, and reform public enterprises. This is a standard set of desirable reforms for transition countries.

Experience suggests though that countries specializing in oil are particularly likely to be burdened with a corrupt and inefficient government. Thus, Azerbaijan's task is especially difficult.

(Wyzan is a research scholar at the International Institute for Applied Systems Analysis in Laxenburg, Austria.)
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